A non-compete provision is a contractual agreement wherein one party agrees not to compete with another party for a set period of time. The growth in physician employment over the past decade has given rise to increased litigation risk stemming from employment contracts and practice sale agreements.
David J. Pivnick of McGuireWoods is attorney whose practice is focused on complex commercial litigation with an emphasis on healthcare litigation. He has observed that non-compete restrictions in physician employment arrangements are not to be taken lightly.
“Typically companies will make every effort to enforce non-competes,” says Pivnick. “If you don’t enforce non-competes, people will argue that you have waived them.”
While most U.S. states recognize the enforceability of non-compete provisions in written agreements, courts do not always find them enforceable. The rights of parties to negotiate contracts must be balanced with rights to engage in one’s profession, and courts may seek to find a middle ground. When an alleged breach has occurred, the former employer will typically send a cease and desist letter to the physician and the new employer. If this initial letter does not elicit a response then litigation may ensue. The former employer may ask the court for injunction relief to enjoin the physician, as well as monetary damages.
“You need to know what the applicable state’s law says,” warns Pivnick. “Some states place restrictions on the enforceability of non-competes. Some states don’t say anything about physician non-competes.”
For example, in Texas, non-compete arrangements that restrict a physician’s ability to practice medicine must include an explicit dollar amount that allows the physician to buy his or her way out of the competitive restrictions. National organizations that employ physicians may even compare the various non-compete labor laws in the states where they operate to try to pre-select the venue that is most beneficial. Such choice of law provisions are most likely to be enforced when there is a rational connection between the parties and the selected state.
There are two primary ways to settle a non-compete dispute out of court. First, the parties may negotiate a monetary amount to be paid by the employee to the employer as compensation for the lost business or damages that may be incurred by the employer.
Alternatively, some type of modified non-compete restriction may be negotiated. For example, an exception may be specifically negotiated for physicians going into private practice rather pursuing employment with a major competitor.
“The big risk in these situations, is that it could impede the ability to enforce the non-compete on a forward-looking basis,” says Pivnick. “The exception may come into play in future dealings. You should trying to tailor the exception to the facts of the situation by making it unique and nuanced, and less generally applicable to other arrangements.”
If the parties do litigate, courts will often assess whether the employer has a legitimate business interest to protect and whether the restriction is reasonable.
An employer must have a legitimate business interest to protect in order for a competitive restriction to be enforceable. Legitimate business interests may be justified by several arguments.
“One common interest may arise where the employer has introduced the physician to referral sources that allowed him or her to grow their practice,” says Pivnick. “The employer may also have assigned patients directly to a physician and thereby created a physician-patient relationship. The patients are not necessarily seeking a specific physician. They only come to the physician through the employer. Physician employees may also have exposure to employers’ trade secrets, strategies, and protected information.”
If the court finds that the employer does indeed have a legitimate business interest to protect, then the reasonableness of the non-compete restriction must also be assessed.
Pivnick observes three major aspects of reasonableness for non-compete restrictions:
- Duration: Up to two year restrictive periods are often considered to be reasonable.
- Geography: Reasonable mile radiuses vary by market. A small radius (e.g. 5-10 miles may be a reasonable distance in Chicago, while a larger radius (~25 miles) may be a reasonable distance in down-state Illinois or other more rural areas.
- Activity scope: The restriction must be reasonable in terms of what is being protected, as opposed to a restriction on competition generally.
“Generally, courts will look at what geographic area is covered,” says Pivnick. “Where are patients and referral sources coming from? A nephrologist may have a 30 to 40 mile radius restriction, but they may not typically see patients traveling that far. However, for a cardiac surgeon or a neurosurgeon that distance may be appropriate. It is a fact specific analysis.”
Pivnick has also observed instances when the geographic scope is not tied in a meaningful way to the services. For example, a restriction that prohibits a former physician employee from working within 10 miles of any former employer’s locations may not be reasonable when the employee only worked at one location.
David J. Pivnick is a partner in the healthcare litigation practice of McGuireWoods. He can be contacted by phone at (312) 750-3585 or by email at firstname.lastname@example.org.